Full text: Repair the roof when the sun is shining (171)

Europe's current economic situation 
the macroeconomic context which is summarized by the output gap. The 
effects of budgetary shocks on GDP is larger and has more lasting effects when 
the slack is bigger. 
In order to measure the macroeconomic impact of fiscal policy, using the most 
recent theoretical advances, we should take into account: (i) the instruments 
used by governments and (ii) the cyclical position that determines the multi­
pliers associated with each instrument. We disentangle the macro fiscal 
impulse among 3 instruments: primary expenses excluding public investment, 
public investment and taxes. The two later cumulate a short term impact on 
demand and a long term supply impact (through incentives to work, to invest 
or through a productivity channel for public capital). The multiplier associated 
with primary expenditures is in general superior to 1 at the short term and 
converges to O at a pace dependent of the macroeconomic slack. A tax cut has 
a lower impact on demand than primary expense on the short run but has a 
long term impact on the supply side. Finally, public investment has a direct 
and big impact on demand at the short run and also improves GDP in the long 
term as public and private capital are complementary. The impact of fiscal 
policy on GDP is computed using the following formula: 
GDP Impactt 
= L L mi,t-k(OGt) x Fh;t-kiEg,t,i k=O 
Where i represents the policy instrument, mi,t-k (OGt) the multiplier 
(dependent on the output gap of time t) associated with the fiscal impulse 
realized in t- k with the instrument i. 
Using the decomposition of fiscal policy and the timing of the implementation 
of the different instruments, we find that fiscal policy supports growth by 
0.4 point in 2017. Between 2015 and 2017, the impact of fiscal policy on 
growth is higher than the fiscal impulse (Figure 2). This can be explained by 
the delayed impact of past tax cuts in several countries, but also with the 
fading of the impact of past consolidation on output. This suggests that the 
dynamic of multipliers4 has been supporting growth during this period. This is 
particularly true in Spain, France, Ireland and Belgium. In 2018 and 2019, the 
contribution of fiscal policy to growth will be more in line with the contempo­
raneous fiscal impulse. This can be explained by the closure of the output 
gaps, leading to lower multipliers that decrease faster, and with the lower 
magnitude of fiscal impulses implemented recently. The contribution of fiscal 
policy to growth is expected to 0.2 point 2018 and 0.0 point in 2019. 
4. i.e. the drop of multipliers associated with past consolidation and the rise of multipliers of past
tax cuts.

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